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Does incorporating non-linearity into discretionary accrual models improve their performance?

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  • Wan, Huishan

Abstract

Using a large sample of firms that restated earnings, this study investigates whether incorporating non-linearity (conditional conservatism) into discretionary accrual models improves their performance in detecting earnings management. The findings of this study are important because discretionary accrual models play a prominent role in several streams of accounting research and the models' ability to isolate the discretionary (managed) component from the non-discretionary (unmanaged) component of total accruals is critical. If the conventional linear discretionary accrual models are mis-specified, it is likely to result in misleading inferences about earnings management behavior. The findings indicate that the non-linear specification improves the performance of most linear models. The findings also indicate that a more sophisticated linear model that incorporates a performance measure and a future growth measure outperforms other simple models.

Suggested Citation

  • Wan, Huishan, 2013. "Does incorporating non-linearity into discretionary accrual models improve their performance?," Advances in accounting, Elsevier, vol. 29(1), pages 85-96.
    • Handle: RePEc:eee:advacc:v:29:y:2013:i:1:p:85-96
    DOI: 10.1016/j.adiac.2013.03.008
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    Cited by:

    1. Forough Heirany & Mahmoud Moeinadin & Manije Nazemizadeh, 2014. "The Role of Accrual Decomposition in Increasing the Information Value," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 4(1), pages 309-318, January.

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    More about this item

    Keywords

    Discretionary accrual models; Non-linearity; Earnings restatements; Earnings management;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General

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